September 1, 2017
Good Morning! In this a.m.’s Blog, we consider the ongoing turn-back of fiscal authority from the State of Michigan to the City of Detroit, the fast-approaching Mayoral election in the Motor City, the searing fiscal challenge in Connecticut not to be Illinois, and the fiscal and physical challenges in Puerto Rico where Hurricane Irma and the PROMESA Oversight Board are bearing down.
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Post-Kilpatrick Motor City. The Michigan Tax Commission has relinquished its control over property reappraisals in Detroit, having voted unanimously to relinquish the state oversight Detroit has been under since 2014 in the wake of mismanagement in Detroit’s Assessment Division, widespread over-assessments, and signal property tax delinquencies—delinquencies in response to which the state commission had imposed a corrective action plan aimed at revamping how the city set its property taxes, or, as Alvin Horhn, Detroit’s assessor and deputy CFO noted: “This is one more symbol that city government has gotten this right: Detroit basically had been an island to ourselves for a long time. That type of intervention was hard to swallow.” The Commission’s actions came as a federal judge yesterday ordered the city’s former Mayor Kwame Kilpatrick to pay more than $1.5 million to the city’s water department as restitution from the City Hall corruption scandal—money which the city is most unlikely to collect, as Mr. Kilpatrick recently claimed he has less than one dollar in his prison bank account, where his longer than Mayoral term will run to 2037. Nevertheless, the judicial order would seem to bring to a close one of the remaining issues stemming from the landmark trial which ended with the former Mayor who bears such responsibility for plunging the city into the largest municipal bankruptcy in American history: he was convicted of running a criminal enterprise out of City Hall that included steering rigged water and sewer contracts to buddy Bobby Ferguson. The reduction in the fee came in the wake of a rule by the 6th Circuit U.S. Court of Appeals after it tossed the $4.5 million figure and directed U.S. District Judge Edmunds to recalculate the restitution amount. (Judge Edmunds had noted that the corruption indictment, which alleged that the cty’s former Mayor former Detroit Water & Sewerage Department Director Victor Mercado rigged bids and steered work to Lakeshore, which had hired Mr. Ferguson’s company as a subcontractor.) The order came in response to the former Mayor’s request that his conviction for racketeering and 28-year sentence be set aside—claiming there had been no corruption during his scandal-plagued tenure, a request he made some 13 months after the U.S. Supreme Court rejected his appeal.
The state Tax Commission’s action came in the wake of allegations that Detroit had been over assessing homes by an average of 65 percent, e.g. assessments imposing significant property tax hikes, based on an analysis of more than 4,000 appeal decisions by a Michigan tax board which has been overseeing a key part of the agreement from the citywide reappraisal initiated in 2014 to bring the Motor City’s assessment role into compliance with the Michigan General Property Tax Act to ensure all assessments are at one half of the market value and like properties are uniformly assessed—a reassessment the Deputy CFO noted had not been made in more than half a century. Michigan Tax Commission Executive Director Heather S. Frick noted: “The city has continued to move forward in their work to improve the residential reappraisal and to complete work on the commercial and industrial reappraisals to maintain and improve the residential reassessments.” The state commission granted Detroit an additional year to complete reassessment of commercial and industrial reappraisals. The good news for the city is that Michigan Tax Commission Chairman Doug Roberts noted that the work Detroit has done in its reappraisals has been “very positive.” He said he had been “concerned about it for a while, but I was very pleased with the report that we got yesterday: The fact of the matter is I think they have been working very hard on it. I was pleased to vote for it.” The city anticipates spending nearly $9 million on the reappraisal project, which has included use of aerial photography, mapping programs, and exterior inspections by staffers to gauge neighborhood conditions and better reflect property values—an effort Mayor Duggan had initiated at the beginning of this election year in the city when he presented his proposed 2017 property assessments in the wake of the completion of the parcel-by-parcel reappraisal for nearly 255,000 residential properties—a comprehensive reassessment which estimated 140,000 homeowners would realize reductions averaging several hundred dollars.
Getting Ready to Rumble. Post-chapter 9 Detroit is heating up with a key pre-election Mayoral debate scheduled for October 25th, when Mayor Mike Duggan will take on his challenger, Michigan state Sen. Coleman Young II. The candidates are to present their respective visions and strategies for the future of post-municipal bankruptcy Detroit, with this marking the second debate of the campaign, after Mayor Duggan prevailed in last month’s primary by a 67%‒26% margin, far higher than any of the remaining six contenders. A key emerging issue in the campaign appears to be what the city will do to address neighborhood recovery, with apprehensions that a newly gleaming and lively downtown has come at the expense of outlying neighborhoods, leaving out citizens who live within the city limits but outside of downtown and Midtown.
UnIllinois. Connecticut Gov. Patrick Malloy, the state’s 88th Governor, in a meeting with the editorial board of the Hartford Courant said that the state’s cities and towns need to tighten their belts, because the state can no longer afford to keep sending them millions of dollars every year, as he expressed pessimism about the state budget. The Governor noted he opposes any increase in the state income tax, even as he reported he sees no light at the end of the tunnel after the months’ long stalemate with the legislature: “I don’t see that the House is anywhere near passing a budget that I could sign: Certainly everything I know about the budget that they’ve deliberated on over the past couple of weeks—means I would not sign that budget.” Gov. Malloy added: “Whatever the House passes, in line with what they’re talking about, wouldn’t get through the Senate. So, we really have made almost no progress…It’s clear to me that they’re not dealing with the budgetary reality. I think, quite frankly, they’re grasping for straws in an attempt to cobble together a budget.” He added that, unlike his predecessor, former Gov. Jodi Rell, he would not allow the state budget to become law without his signature. Indeed, in response to the query whether the stalemate could last into December, his budget director, Ben Barnes, responded: “We can operate with all of the schools open and everything moving along until March.”
The budget stalemate comes as millions of state dollars are being withheld under an executive order, thus Gov. Malloy and his Budget Director Benjamin Barnes note that municipalities such as Hartford, Waterbury, Scotland, Sprague, and West Haven could be facing financial problems later in the fiscal year. Director Barnes noted: “We don’t want to have towns become insolvent or bounce paychecks or miss vendor payments…On the other hand, if they’re going to ask us for extraordinary help, we’re going to get in their business a little bit and make sure that they’re doing the things that they should be doing to get through a very austere and uncertain time.” At the same time, in this intergovernmental unbalancing act, Gov. Malloy has spoken strongly against any increase in the state income tax, saying it would be damaging to the economy and prompt some rich residents to flee the state.
Even though an income tax increase is not currently in any of the fiscal plans circulating at the state Capitol, some lawmakers have not backed off the idea. In an interview with an editorial board, the Governor noted: “A further raise in the income tax would be extremely detrimental to the long-term health of the state…Extremely detrimental…We should put up a one-way toll for everyone who moves to Westchester County.” The state raised the income tax rate on the state’s millionaires in 2009, 2011, and 2015; today the top rate is 6.99%; income-tax proponents have said they have at least 45 votes in the House Democratic caucus for an increase in taxes on the wealthy; however, House Speaker Joe Aresimowicz (Berlin) said earlier this year that 45 votes is far short of the requisite 76 votes to pass in the 151-member chamber. Similarly, Senate President Pro Tem Martin Looney (D-New Haven) notes: “There’s no serious proposal at this point out there on income-tax change.” He expects a vote on the two-year, $40 billion budget the week after next, noting: “There’s a growing sense that we need to vote that week to forestall the Governor’s executive order from taking effect…the Democrats will need to have an agreement with the Governor in order for the lieutenant governor to cast the tie-breaking vote.” House Majority Leader Matt Ritter (D-Hartford) agreed that the legislature must avoid large cuts to cities and towns that would take effect on the first of next month if Gov. Malloy’s executive order continues. Unsurprisingly, in his discussion with the Courant editorial board, the Governor was pessimistic about the long-running soap opera at the Capitol, noting that if the income tax were to become a major part of the discussion, the battle could last even longer: “I don’t think that there is any likelihood” of a budget passing with an income tax increase.” The Connecticut House is scheduled to vote a week fvrom next Thursday; however, the specifics have yet to be settled. In the state Senate, three moderate Democrats have all raised concerns about possible tax increases: there positions are critical as that chamber is evenly divided with 18 Democrats and 18 Republicans.
The legislative stalemate led some 25 mayors and first selectmen to travel to the Capitol this week to plead their case for increased assistance and a quick budget resolution: the municipal leaders are seeking to avoid a revised plan by the Governor which would eliminate all education cost-sharing funds for 85 towns and reduce the total for about 54 others: under the pending proposal, the towns would collectively lose hundreds of millions of dollars if the legislature is unable to pass a budget and the Governor’s revised executive order takes effect.
The proposed sales and use tax increase to 6.85 percent in the House appears to be the key impediment: Rep. Danny Rovero, a key swing voter in the House Democratic caucus, who represents the municipalities of Killingly, Putnam, Thompson, said he will vote against the pending budget due to the proposed hike in the sales tax to 6.85 percent, up from the current 6.35 percent: “I’m not in favor of the sales tax; I’m not in favor of any tax. I’m not saying it won’t pass, but it won’t be with my vote.”
Because the Democrats hold a 79-72 edge in the House, they can only afford the loss of three of their members; ergo, Rep. Rovero’s vote matters. Being one of the most fiscally conservative Democrats, Rep. Rovero’s position is that the legislature needs to cut state spending and shift more work to nonprofit organizations which hold contracts to provide state services, such as group homes. He believes that nonprofits provide the services at a lower cost than the state, where employees receive more generous benefits and larger pensions. Nevertheless, he appears willing to listen to the plan by Gov. Malloy and the House Democrats to raise the cigarette tax to $4.35 per pack, up from the current $3.90 per pack.
The looming vote comes as the Malloy administration has warned the towns repeatedly that they would be receiving fewer state funds than in the past. His budget spokesperson, Chris McClure, notes: “While we can disagree on our opinions, we should not disagree on the facts…And the fact is, over the last five years, municipal aid increased 21 percent as billions of dollars have been slashed elsewhere in the state budget.” For Gov. Malloy, he made clear, succinctly: “I’m trying to stop us from being Illinois.”
Physical & Fiscal Threats. As Hurricane Irma bears down on the U.S. Territory of Puerto Rico, a parallel fiscal storm is arising, as Governor Ricardo Rosselló has reiterated his refusal to give way to that guideline of the PROMESA Oversight Board: stating there will be public employment as usual, refusing to kowtow to the Board’s demand and clarifying that his actions are not a matter of imprudence, but rather of being “firm,” since, in his view, the Board’s order was not justified and was not contained in the fiscal plan, approved last March: “The implementation of the reduction of working hours was never an agreement within the fiscal plan. It was a recommendation that was implemented unilaterally,” noting his apprehensions that “such action is not necessary” since it exceeded the Board’s claims regarding a reservation, and noting that reducing the day would have “a negative impact on the economy,” as well as not be transformative of the government—stating: “There is a big difference between being firm and reckless. Our government is being firm in its position. There is no need for a reduction in working time now. There is not…But we want to be cautious and talk about how we got to that point. We must be cautious and give space to what would be the first reporting period that would be in October where our government has not yet had the opportunity to prove those findings under the PROMESA law. We are being cautious in this assertion. We are being rational in this assertion, but we are also being firm, because we understand that it is a measure that will not yield beneficial results for Puerto Rico and, therefore, tomorrow as we have established, that measure will not be implemented.”
The Governor’s comments came in reaction to the Board’s action early in the week to go to court Monday to force the government to comply with fiscal measures it deems necessary needed to revive Puerto Rico’s economy, seeking declaratory and injunctive relief against Gov. Ricardo Rosselló and his government, and a court order to mandate Puerto Rico’s government to introduce a 10 percent furlough program for most of its employees to save money. It is also asking the court for an order forcing the territory to comply with planned cuts to government pension benefits. Natalie Jaresko, the executive director of the Oversight Board, said the measures are necessary to reduce spending: “Fiscal reform is a difficult but necessary process for Puerto Rico and the credibility of the plan lies in its enforcement.”
Nevertheless, the Governor stressed the importance of the ongoing dialogue with the PROMESA Board federal entity in charge of the island’s finances continues: “That goal and that commitment continues and I can tell you the day, still, although it does not appear at times, our government practically every day is in communication with the Board, with the Board advisers to continue measuring and looking for what are these targets for compliance with the tax plan: Let there be no doubt that our government has a commitment to comply with the fiscal plan.”
PROMESA Board Chair José Carrión said that the Governor is a citizen of “law and order” and expected him to comply with a possible reduction decision, adding that that the measure would be more severe if it was not done now.
What about the Municipios? The Puerto Rico Senate met yesterday in Mayagüez, Puerto Rico’s eighth-largest municipality, a muncipio founded as Nuestra Señora de la Candelaria, which is also known as La Sultana del Oeste (The Sultaness of the West), Ciudad de las Aguas Puras (City of Pure Waters), or Ciudad del Mangó (City of the Mango). On April 6, 1894, the Spanish crown gave it the formal title of Excelente Ciudad de Mayagüez (Excellent City of Mayaquez) to address the concerns of that area of the country, especially the role of two regional airports in the economic development of the area and the precarious fiscal situation of the 12 municipalities of the area: the public hearing included members of the Senate, constituting what is known as a Special Special Commission. At the hearing, the mayors of the western area reviewed the main challenges facing municipalities in the midst of the economic crisis: among them, the recurrent theme of cuts in so-called subsidies for municipalities, some $ 350 million in two years. West Chamber of Commerce President Kenneth Leonor told El Nuevo Dia that the region’s economic problems could be tackled by public-private alliances in areas such as technology and tourism and municipal enterprises, noting: “We need more foreign and foreign investment that can reach Puerto Rico.” For Felipe Morales Nieves, president of the Economic Movement of Development of the West, it is crucial that improvements be made to the airport Rafael Hernandez, in Aguadilla, to turn it into an international one that serves the Caribbean clientele.